valuing vinamilk by fcff method

JOHN VON NEUMANN INSTITUTE

VALUING VINAMILK BY FCFF METHOD

Hoang Hai Nguyen – [email protected]

Nguyen Thi Ngoc Ha

HCM City, 6th February, 2012

Fundamental & Technical Analysis

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Valuing VINAMILK company – a company among the top 10 market capital

listing (both HOSE and HNX) using the Free Cash Flow to the Firm method.

1) Economic analysis:

a. GDP growth rates: In 2011, GDP growth achieve: 5.89% [1].

b. Inflation: increased 18.13% in 2011 Error! Reference source not found.. Input

material’s prices are increased.

c. Interest rates:

- VND Interest rates brings back to max 14%/year by commercial banks.

Expectation, in 2012, the rate is lower to 10%/year, by requires to

inflation control of the government.

- Lending rate is slowly down from the end of September: Lending rate for

agriculture and export area at 17-19%/year; Lending rate for other area at

17-21%/year.

- With USD, Interest rates keep stable 2%/year, lending rate for all long,

short, middle term at 6–8%/year [2].

d. Energy prices:

- Gasoline price at 20.800 VNĐ/litre A92 of 2011 and will increase by

unstable situation at Mid East (where provided oil the most of the world).

- Power price increased about 10-15% by required of market, the

government will restrict to subsidize. Maximum rate is 15.6% by requires

to inflation control of the government.

2) Industrial:

a. Growth rates: In 2011, Milk area growth achieve 15.8% with 2010 [3].

b. Trends: Continue growth in next 10.

- According to data on 01/10/2011 of the General Statistics Office,

the total dairy herd of the country in 2010 increased 11.31% compared to


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2009, from 115,518 to 128,583 (13,065 additional). Compared with

2009, total production of raw milk production in 2010 increased 10.23%

increases 28,472 tons from 278,190 tons in 2009 to 306,662 in 2010.

- The amount of raw milk only reached about 22% of milk consumption in

Vietnam, Vietnam must import the rest, mostly is milk powder

reconstituted to meet the demands of milk 86 million Vietnamese people

with the consumption of about 14 kg / person / year.

- Milk consumption rate in Vietnam is relatively low compared to the

average of the world. Such as, consumption in Thailand at about

23kg/person/year, at developed countries are much higher. Forecast for

milk consumption in Vietnam from now to 2013 about 15% / year and

total milk consumption in Vietnam in2013 will reach about 2 billion litres

[3].

c. Foreign competition: Milk consumption market share [5].

Fresh milk

Yoghurt Condensed

milk Powder

and other Overall market

share Vinamilk 53% 80% 75% 30% 39%

Dutch Lady 30%

20% 25%

16% 24%

Hanoi Milk and domestic label

17% 0% 15%

Import 0% 0% 0% 54% 22% Total 100% 100% 100% 100% 100%

- Fresh milk will begin to face competition from the Food Corporation TH

Milk: In cooperation with Bank of North Asia Commercial Joint

Stock investment, project "Dairy farming and milk processing on

industrial scale "with a total investment about $1.2 billion.

- As above, first step is $ 350 million, is the largest project in the field

of agricultural high-tech applications first in Nghe An and over the

country. TH Dairy Factory was built on a total area of 22 hectare will be


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a modern factory in Southeast Asia with modern advanced technology,

Tetra Pak - Sweden, production capacity is expected to reach capacity of

500 tons / days in 2012 and reached 500 million liters / year in 2017.

Dairy products are the first to use 100% of fresh milk from clean and

high TH Milk farm system promises to provide abundant sources of raw

milk to consumers instead of milk powder, enough to

reach demand Vietnam's milk in the future. Mr. Tran Bao Minh - General

Director of JSC TH Milk Food, said the company strives ahead to

2012 the market will supply about 50% of the total milk production in the

country today. Within 7 years the company's fresh milk will be more

than 3-4 times the current amount of milk in the country. (Source

from TH Milk).

- Condensed milk: Market share stability, along with Dutch Lady, VNM

up large proportion of the domestic market.

- Continue take the competition from powder milk: follow psychology

prefer foreign milk powder remained strong in the minds of the

Vietnamese. In supermarkets, powder milk exhibited about 70%

foreign pavilions with the milk powder has penetrated into Vietnam a

long time: Abott, Mead Johnson, Nestlé ...

3) Company analysis:

a. Management team: Vinamilk is managed by a team of enthusiastic

and experienced in the industry. Chairman Mai Kieu Lien has 30 years'

experience in the dairy industry company and hold a key role in the process

of growth and development of the company until today. Members

of other senior managers average 25 years' experience in the field of

production, distribution and sale of dairy products. We also have a team

of strong centralized management turn be better equipped to support senior


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management and to add youth and enthusiasm to the development of the

Company.

b. Patents: VNM implementation of cooperation with research

institutes, scientists in the country, using the patents of VN scientists.

Restoring factory Dielac formula is a proof.

c. Products and market share: [5] Approximately 200 items of milk and

other dairy products, divided into four main types of milk.

- Fresh: VNM's 53% market share.

- Yoghurt: PAN accounted for 80% market share.

- Evaporated milk: PAN accounted for 75% market share.

- Powder: PAN accounted for 25% market share.

d. Marketing: Using the 4P mix marketing strategies to achieve key marketing

target market includes: Product, price, place, trade promotion or

communication.

PLACE:

- Head Office in Ho Chi Minh, 3 branches are located

in Hanoi, Da Nang, CanTho. Vinamilk has domestic distribution

system includes 250 distributors and 140,000 retail locations the

64/64provinces. System cabinets and freezer, cold cars are also being

invested to expand to meet growing demand of fresh milk and

yoghurt group.

- Expanding the domestic market to consumers through two formation:

+ Tradition: retail distribution to consumers.

+ Modern: Metro Supermarkets and consumers.

- Export Markets: The Company is always looking to expand the

market and exported to other countries in the region and the world to

maintain and develop export sales (exported over 15 countries).


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PRICE:

- The price is a concern mainly because this is the competition and

encouraging consumer product selection decisions.

- The company focuses on reducing raw material inputs imported from

abroad. Product prices will be adjusted in accordance with the income

of workers.

PRODUCT:

- Diversification of dairy products (yogurt, milk, condensed milk, milk

powder) in accordance with consumer objects (children, adults,

pregnant women).

PROMOTION:

- Promote products widely to consumers through the mass media:

television, magazines, internet, poster ...

- The company has the strategic marketing of products to suit each

time, each region and age.

- Implement programs to try the product in public places: supermarkets,

schools ...

- In addition to trading companies also interested in social activities and

charity.

PEOPLE:

- Besides the traditional 4P marketing mix to include other 1P is equally

important that the listing has and continues to promote the company

that is human.

e. Sales: Main business activity:

- Production and sales of canned milk, milk powder, nutrition powder,

bread, milk, soy milk, soft drinks and other dairy products;


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- Trading in food technology, equipment and spare parts, supplies,

chemicals and materials.

- Trading in food technology, equipment and spare parts, supplies,

chemicals and materials [3].

f. Brand name: Nielsen - media companies and leading information,

providing information on the indicators measured media, market and

Singapore's Campaign magazine has ranked in the Top 10 strongest

consumer brand in Vietnam South with strong brands in each sector for

2010.Accordingly, CAN 9 and ranked number one in the soft drink

industry [7].

4) Financial statements remark[6]

No. Basic financial information 2007 2008 2009 2010 2011

BALANCE SHEET (billion VND)

1 Charter capital 1752 1752 3,512 3,530 3,708

2 Total assets 5,425 5,967 8,482 10,754 15,564

3 Total debt 1,073 1,301 1,991 2,804 3,152

4 Equity 4,224 4,666 6,491 7,950 12,412

5 Long-term Debt 32 22 12 0 0

6 Net asset value/ 1 share (BV) 24,101 26,619 18,378 22,556 20,750

REPORT LOSS/ GAIN (billion VND)

7 Revenue 6,675 8,381 10,856 16,173 22,264

8 EBIT 955 1,371 2,732 4,231 4,932

9 Net Income 963 1,249 2,381 3,595 4,166

DIVIDENDS (VND)

10 EPS 5,607 7,132 6,769 6,683 7,623

11 Dividend 2,900 2,900 3,000 4,000 3,291

RATIOS (%)

12 LNTT/DT 14% 16% 25% 26% 22.15%

13 LNST/VCSH 23% 26.77% 36.68% 45.22% 33.56%

14 Debt/VCSH 28% 28% 31% 35% 25%

15 ROE 28% 28% 42.43% 49.79% 40.92%

16 ROA 21% 22% 33.17% 37.54% 31.76%

Growth:


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- Despite the difficulties caused by economic crisis, business activities

of VNM in 4 years are very positive. Revenue growth always reaches

over 26% a year. Particularly in 2010, 2011 VNM growth reached

49%, 37.6% respectively and is the highest growth since its

establishment. The above results have been a part from rapidly

increasing trend of milk products in recent years along with the

increasing amount of product sold. Even the cause is unknown; the

maintaining of the high growth rate is remarkable for large-scale

enterprises as Vinamilk.

- Thanks to good business results, the policy of paying only part of the

profits, and the rest will be reinvested to make equity faster. As of

2011 the equity of VNM was nearly three times higher than in 2008.

In issue 10.7 million shares to strategic shareholders in early 2011,

VNM collected 1.276 billion surpluses the company to increase cash

flow for expansion of production in the near future.

- In 2011, business activity of VNM still maintained good growth after

very successful 2010. Specifically, net income, profit from operations,

profit after tax increased by 54.83%, 38.73% and 35.22% respectively.

EPS in 2011 reached 8,767 per share (before the stock split).

- In the last 3 years, ROE targets of VNM are very high and tend to

increase. But in 2011 this indicator can be slowed by increasing equity

from capital surplus after issuing shares to strategic shareholders.

Solvency assessment:

- Thanks to the strong financial resources, VNM limit the use of

financial leverage for business activities. Coefficient of short-term

solvency, fast payment and instant payment at the end of quarter

3/2011 is very high and significantly improved compared to previous


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years. At the time 09.30.2011 these indicators respectively at 3.39;

2.08; 1.21 shows that there is no risk in short pay of VNM.

- But it also shows that VNM is not good at using financial resources

for development activities in business. If the financial leverage is used

better, growth of this business can be even higher.

Assess profitability

- About the Indicators of profitability of VNM showed that the business

is very efficient. The target of profit margin, net profit margin, ROA,

ROE in the first 9 months reached 31.20%, 20.29%, 25.30% and

32.57% respectively. From 2008 to 2010, the business performance of

the VNM tends to increase over the years reflected the steady increase

of the criteria mentioned above. This shows that the PAN was right in

the business strategy to focus the main product instead of expanding

into other business areas.

5) Valuation model: FCFF

The basic assumptions about the future macroeconomic:

- The base rate of VND is currently 14% and will be reduced by 13% in

the quarter I/2012 and then continued to decrease to 9% in late 2012

(quoting from HSBC forecasts).

- Inflation in 2012 will be at 10.5% per year and average inflation of the

period 2010 - 2015 was 8% per year. (Quoting from WB forecast).

FCFF valuation model

- Calculate the WACC

2011 Liabilities 3,152 (billion VNĐ) Shareholder's equity 12,412 (billion VNĐ) Firm value 15,564 (billion VNĐ)

Debt/Total Asset (Wd) 0.202519 Rdebt 0.08 Tax (t) 0.15 Equity/Total Asset (We) 0.797481 Requity 0.14


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WACC = Wd. Rd. (1 − t) + We. Re = 0. 1254 = 12,54%

- Determine the cash flow: Suppose VNM profit growth will be 15% in

2011-2015 and then it will decrease and stablize at 5% in 2020 .

2011- 2015

2016 2017 2018 2019 2020

The growth rate of profits 15% 13% 11% 9% 7% 5%

The rate of depreciation 3% 3% 3% 3% 3% 3%

The growthrate of depreciation 30% 20% 20% 20% 20% 20%

- Calculate the FCFF:

�� = ��. (1 − �) + Depreciation − Capitalexpenditure

−DemandforVLĐ

0

2

4

6

8

10

12

14

16

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

g (%)


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Stage I 2011 2012 2013 2014 2015 EBIT 4,932 5,672 6,523 7,501 8,626 EBIT.(1-t) 4,192 4,821 5,544 6,376 7,332 Depreciation 366 476 619 804 1,045 Demand for working capital 0 0 0 0 0 Capital expenditure 3,166 3,375 3,604 3,825 4,033 FCFF 1392.2 1922.10 2559.00 3354.43 4344.82 Stage II 2016 2017 2018 2019 2020 EBIT 9747.49 10819.72 11793.49 12619.03 13249.99 EBIT.(1-t) 8,285 9,197 10,024 10,726 11,262 Depreciation 1,254 1,505 1,806 2,168 2,601 Demand for working capital 0 0 0 0 0 Capital expenditure 4,143 4,598 5,012 5,363 5,631 FCFF 5397.08 6103.66 6818.57 7530.69 8232.37

- Determine the present value of the company based on 2-stage FCFF

model:

Year FCFF n (1+WACC) 1/[(1+WACC)^n] PV

Stage I

2011 1392.2 1 1.125418 0.888558 1237.05 2012 1922.11 2 1.125418 0.789535 1517.57 2013 2559.00 3 1.125418 0.701548 1795.27 2014 3354.43 4 1.125418 0.623366 2091.04 2015 4344.82 5 1.125418 0.553897 2406.58 Total PVI 9047.51

Stage II

2016 5397.08 6 1.125418 0.492170 2656.28 2017 6103.66 7 1.125418 0.437321 2669.26 2018 6818.568 8 1.125418 0.388585 2649.60 2019 7530.691 9 1.125418 0.345281 2600.21 2020 8232.366 10 1.125418 0.306802 2525.71 Total PVII 13101.06


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Stage III: with the stably profitable growth rate 5%

- In 2021:

�� = �� ∗ (1 + 0.05) =8643.984 (��)

�� =��

(��)∗

�

(��)�=35163.66 (��)

- Value of the company at the present:

�� = �� + �� + �� =57312.23 (��)

- In 2011, the amount of VNM shares is: 556,000,000 shares.

The value of share of VNM is:

� =��

�=

��.��(��)

��,��,��=103079.56 ��/�ℎ��

6) Valuing result and comparison with market price and Recommendation

With Vietnam's GDP will continue to grow in the long time, the demand of the

Vietnamese milk is increasing. Therefore, Domestic market of VNM will still

continue to increase in the future. On the other hand, VNM has focused on dairy

exports to foreign markets. In 2011, export revenues of VNM 170 million USD,

and will continue to rise this year. VNM shares is so very interesting in the present

time.

At 06/02/2012, in the market, the price of VNM is 87,000 VND/share. While, by

FCFF valuation model, the price of VNM is 103,079.56 VND/share in 2011.

Therefore, we recommend for buying VNM stock.

REFERENCES:

[1] Economic – social Statement, 12/2011, General Statistics Office.


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[2] Report of “updating improved stocks”, 22/11/2011, made by RVS.

[3] The Index of Industrial Production, 10/2011, made by Ministry of Industry

and Trade

[4] Report for VNM, 03/01/2011, made by FPTS.

[5] Report for VNM, ngày 15/12/2011, made by ABS.

[6] VNM’s annual report in 2007-2011, made by Vinamilk.

[7] http://www.vietnambranding.com

[8] Beta coefficients of the industry in Vietnam, 31/03/2011

[9] Document of Shareholders meeting in 2011, made by Vinamilk.

***** THE END *****

valuing vinamilk by fcff method

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